Though most of the 2017 Trump-GOP tax law expires at the end of 2025, certain provisions governing how corporations deduct expenses have already expired. These changes have resulted in corporations paying higher taxes over the past few years, so Republicans want to retroactively reverse them as part of their effort to permanently extend the whole law. The expired provisions should instead stay in place to ensure corporations pay closer to their fair share of tax.
Bonus Depreciation
Businesses reduce their taxable income by deducting the cost of their purchases, but large items that last a long time–like buildings, machinery and vehicles–are supposed to be written off slowly (“depreciated”) to accurately reflect their slow loss of value. In its first five years (2018-22), the Trump tax law instead allowed the full cost of these big items to be deducted in the year of purchase–what’s known as “bonus depreciation” or “expensing”. The loophole closed in 2023, but corporations want to restore it retroactively, claiming that without this tax break, they will be forced to roll back business investments. But the reality is that when the 100% bonus depreciation was in effect, corporations spent a huge amount of their tax windfall enriching their executives and wealthy shareholders.
An analysis by Americans for Tax Fairness revealed that a dozen of the biggest corporate beneficiaries of bonus depreciation reaped nearly $43 billion in tax savings from the loophole over the five years it was in effect. Combined, these handful of corporations reported over $1 trillion in pre-tax profits during the same time period, while paying a collective effective federal rate of only 11.6%—far lower than the statutory corporate tax rate of 21%. Over that same time span, these dozen mega-corporations poured hundreds of billions of dollars into non-productive activities that mostly enriched just a handful of ultra-wealthy individuals at taxpayer expense, including $526 billion on stock repurchases, $251 billion on dividend payments, and $6.4 billion on executive compensation.
Additionally, two-thirds of the bonus depreciation tax break goes to corporations with over $250 million in annual revenue. Not only is bonus depreciation an expensive giveaway to the largest businesses, it is also one of the least effective forms of economic stimulus. Moody’s Analytics has estimated that only 27 cents of increased economic activity is generated for each $1 of lost revenue.
Reviving bonus depreciation would cost $378 billion in lost revenue over the next decade and it’s likely that top corporate executives and wealthy shareholders will benefit most. These hugely profitable large corporations do not need additional tax cuts.
Looser Interest-Deduction Rule
To discourage corporations from excessive borrowing and to partially pay for other corporate handouts in their 2017 tax law—most prominently a 40% corporate tax-rate cut—the Trump-GOP tax law restricted the amount of interest corporations could deduct from their federal taxes. This limitation was originally calculated as 30% of a corporation’s “earnings before interest, taxes, depreciation and amortization” (EBITDA). But that rule was designed to become more strict over time, switching in 2022 to “earnings before interest and taxes” (EBIT). Determining earnings after depreciation and amortization have been subtracted leads to a smaller earnings figure and therefore a smaller amount of deductible interest.
Renewing this tax break would cost $53 billion in revenue over the next decade, half of which would go just to corporations with over $1 billion in revenue.
Case study of how Interest Expensing is Exploited by Private Equity:
One of the biggest lobbying groups demanding retroactive reversal of this tougher tax rule is the private equity (PE) industry. Private equity’s main business is the leveraged buyout: taking over companies by using lots of debt.
In 2019, Instant Brands—maker of Instant Pot cookers—was acquired by the private equity firm Cornell Capital. In 2021, Cornell forced Instant Brands to take out a $450 million loan to refinance debt from the 2019 acquisition and make a $245 million divided payout to shareholders, of which Cornell Capital received 70%. In 2022, Instant Brands’ EBITDA was a little over $57 million, which means under the looser rules they would be able to deduct up to $17 million in interest expense from their federal tax bill, subsidizing Cornell Capital’s debt-financed payout to itself at taxpayers’ expense. In 2023, laden with interest payments that were likely to outpace their revenue, Instant Brands filed for bankruptcy, throwing into jeopardy the livelihoods of their 1,800 North America employees.
Research And Experimentation Expensing
Corporations have traditionally been allowed to deduct all of their research expenses in the year incurred, even though a lot of research pays off slowly so its costs should similarly be written off over time. Adopting this position, and as a way to partially pay for its big corporate-rate cut, the Trump-GOP tax law decreed that after 2021 companies would have to write off research and experimentation expenses gradually: over five years for domestic research, 15 years for foreign. This requirement to “amortize” the expense over time reduces the value of the deduction, increasing corporations’ taxable income and requiring them to pay more in income taxes upfront.
There is no evidence that spreading out the cost of R&E deductions has any effect on corporations’ decision to invest in research. In fact, in 2022—the first year in which research could no longer be expensed—eight of the nation’s largest tech and defense corporations, who all depend heavily on research, spent 27% more on R&E than they did in 2021, when they were able to write off all the costs immediately.
Returning to single-year R&E deductions would cost $277 billion in federal revenue over the next decade, which is more than the cost of providing every 3 and 4-year-old with a free pre-school education.
Who Would Benefit From These Corporate Handouts
The bottom 80% of households on average would benefit between $40 to $58 each year if these corporate tax changes are pushed through. The real winners would be the richest 1% and foreign investors, who combined would receive a $52 billion tax cut in the first year alone.
